The Parliamentary Under-Secretary of State for Communities and Local Government (Barbara Follett): I beg to move,

The Chairman: With this it will be convenient to consider the Code of Audit Practice 2010 for Local Government Bodies.

Barbara Follett: It is a pleasure to serve under your chairmanship again, Mr. Russell. The Audit Commission, in accordance with its obligations under the Audit Commission Act 1998, prepared codes of audit practice prescribing how auditors must carry out their statutory functions when auditing local government and local NHS bodies. As such, the codes can neither add to nor detract from auditors’ statutory responsibilities as set out in the 1998 Act.

The codes are the Audit Commission’s documents, prepared by the commission after consultation with stakeholders, and are to be used by the independent professional auditors whom the commission appoints to audit local government and NHS bodies. The Audit Commission has prepared separate codes for local government bodies and NHS bodies to reflect the different accounting, corporate governance and performance management frameworks in the two sectors. My role is limited to bringing the codes to the Committee for consideration and approval.

The codes prescribe the way in which the external auditors of local authorities and NHS bodies should discharge their statutory duties when auditing the accounts of those bodies. The 1998 Act requires the commission to review the codes. The codes must be approved by affirmative resolution by both Houses of Parliament every five years. The current codes were approved in March 2005. An amendment to the local government code was laid before Parliament in July 2008 to reinstate auditors’ responsibilities to issue an annual letter to those local government bodies in respect of which the Audit Commission has inspection responsibilities. However, the end of the five-year period for the current codes remains 9 March 2010.

The Audit Commission has worked closely with key stakeholders in producing the new codes. The separate codes have facilitated the process of agreeing the NHS code with the Care Quality Commission. In line with the 1998 Act, the Audit Commission has obtained the agreement of the Care Quality Commission to the changes made in the new codes. In addition, the Audit Commission consulted key stakeholders on the proposed changes to the codes, including the representative associations of local government and health bodies, finance directors, the accountancy profession and partner firms. That consultation saw the proposed changes to the codes endorsed by stakeholders.

The audit codes are high-level documents that prescribe the way in which auditors of local government and local NHS bodies carry out their audit functions. They omit material that simply summarises the requirements of professional auditing standards. Changes to the codes are minimal, reflecting legislative and technical changes since the current codes were approved, including the abolition of the audit of best value performance plans for specified local government bodies and the replacement of the Healthcare Commission by the Care Quality Commission.

It may be beneficial to describe briefly the contents of the codes. The preface and first section of the codes set each code in context. They set the scope of the audit and the auditor’s objectives, and the general approach to be adopted by auditors in meeting their responsibilities. They also underline the need for auditors to preserve their independence from both the audited body and the Audit Commission and to ensure the security and confidentiality of data received or obtained in the course of the audit.

Section 2 prescribes how auditors should carry out their statutory functions in respect of the audit of financial statements. This is the core of the audit process. The auditor is required to be satisfied that the financial statements of the audited body comply with statutory requirements and that proper practices have been observed in compiling them, and is also required to express an opinion on whether the financial statements give a true and fair view of the financial position of the audited body and its income and expenditure.

Section 3 covers the auditor’s responsibilities to satisfy himself or herself that the audited body has put in place proper arrangements to ensure economy, efficiency and effectiveness in its use of resources—usually referred to as value for money. Section 4 refers to reporting the results of the audit work to the audited body, including through the published annual audit letter. Auditors also have a statutory duty to consider, in the public interest, whether to report on any matter that comes to their attention, so that it may be considered by the audited body concerned or brought to the attention of the public, perhaps through a written recommendation to the audited body requiring the matter to be considered and responded to publicly. Those are powerful ways of holding public bodies to account.

Section 5 of the local government code sets out the principles relating to the exercise of specific powers and duties of local government auditors. Those include the obligation: to give electors the opportunity to raise questions about the accounts; to consider and decide on objections received in relation to those accounts; to apply to the court for a declaration that an item of account is contrary to law; and to consider whether it would be appropriate to issue an advisory notice or make an application for judicial review.

Schedule 1 of the local government code explains the approach that should be taken to the audit of small bodies such as parish councils, where annual income or expenditure is below a certain threshold. The code recognises that it is the responsibility of such bodies to put in place proper arrangements to ensure the proper conduct of their financial affairs.

The codes will come into effect once they have been approved in this House and in another place. Once in place, they will continue to provide assurance that public bodies will be subject to effective, independent audit. Effective external audit is a fundamental aspect of the scrutiny of local government and the local NHS—never more so than at a time when there is intense interest in spend by public bodies, and a drive to stretch every public pound, to cut waste and to give the public the information that they need—and deserve—to hold local government and local NHS bodies to account. The codes are an essential part of ensuring that scrutiny.

The Chairman: The codes can be debated together, but there will be separate decisions. The time allocated is until 6 o’clock. That is not a target to reach, but a time that we must not go beyond.

Robert Neill (Bromley and Chislehurst) (Con): It is a pleasure to serve under your chairmanship today, Mr. Russell. As Henry VIII used to say to his wives, I will do my best not to detain you long. I am grateful to the Minister for having comprehensively set out the rationale behind the codes. The Conservative party does not take any great issue with what is proposed; it is a necessary part of the process. One or two points are often raised about local government audits, but I would struggle to raise them in this Committee as they do not generally fall within the purview of the codes. Members of the Committee will know that the issue of the level of audit fees is often raised. However, the remit of the codes do not permit us to debate that today, although it is perhaps the most significant concern that has been raised. The Minister is alert to that, and perhaps we can debate the matter elsewhere.

I note that both codes refer to the responsibility to produce a remuneration report, and that is right and proper. In the light of discussions that have been reported elsewhere, will the Minister tell us whether in due course it is proposed to issue guidance about the form or content of the remuneration reports, in relation to local authorities and local health bodies?

I welcome the fact that section 5 of the local government code refers to the ability of local electors to see copies of and question the accounts of local government bodies. Many people in local government might wish, in the interests of greater transparency, that a similar provision was in place in the code for health authorities.

However, it is probably not possible to do those things at this stage of the proceedings, so I will not delay matters further. We shall not oppose the codes. We have flagged up areas where sensible changes can perhaps be made in due course, but some of them will undoubtedly require primary legislation. Restrained as we are by the shape that the codes must take under the Audit Commission Act 1998, we have no objection to them as laid before Parliament.

John Hemming (Birmingham, Yardley) (LD): I am pleased to serve under your chairmanship, Mr. Russell. There is nothing massively contentious in the codes, although I, too, wish to mention the concern raised by the hon. Member for Bromley and Chislehurst. Obviously, the more complicated the codes and processes are, the higher the fees will be. It is relatively sad to see that no assessment has been made of what costs will arise from various aspects of the auditing process. Audits can be done in a number of different ways, and the way in which they are done affect their cost.

I have concerns about the transfer from the Commission for Social Care Inspection to the Care Quality Commission and Ofsted. Information seems to have been lost, and it is sad that there has been no information audit. For instance, serious child care incident notifications before April 2007 were lost, which is not acceptable. That is not picked up in the audits that we are considering, but I am concerned that unacceptable practices are allowed to develop and are not picked up properly by a regulatory process. Whether that should form part of an audit at some stage is another question. However, the codes are not greatly contentious, and I am sure that everybody will vote the same way.

Sir Peter Soulsby (Leicester, South) (Lab): As a former member of the Audit Commission, I cannot resist the opportunity to say what I promise will be only a few words about the guidelines. I welcome the fact that they are being updated in full consultation with the audited bodies and key stakeholders, as the Minister said.

However, I want to pick out one element: the work that the Audit Commission undertakes with partner inspectorates and the review agencies. Both sets of practice refer to that. The Audit Commission and those partner agencies recently undertook an initiative called the Oneplace assessment. I would like to issue a warning. In some of the Oneplace assessments done with other agencies under the existing audit practice code, the auditors have had a tendency to over-simplify their assessment of services in particular areas by using red and green flags. That is a somewhat simplistic approach, although I am sure that it is intended to make the audit more accessible to the communities served by those bodies. In fact, though, it runs the risk of simplifying matters to the point of unfairness to the bodies audited.

I urge the Minister, in her discussions with the Audit Commission, to stress the importance of presenting the result of its audits to local communities in a way that is fair to the bodies audited. Otherwise the Audit Commission runs the risk of being seen not as a critical friend to the bodies that it audits, as it was in the past, but as their hostile enemy.

Barbara Follett: I thank hon. Members from all parties for their forbearance and understanding while we have debated a limited area of an occasionally contentious subject, and for how they have dealt with it. I assure the hon. Member for Bromley and Chislehurst that my Department is working closely with the Chartered Institute of Public Finance and Accountancy on the form and content of remuneration reports.

The points made are all apposite and true. We are strengthening the focus on ensuring the security of data, which becomes more of a concern the more technologically advanced we become. The data and information collected during an audit can be very potent indeed.

On the points raised by my hon. Friend the Member for Leicester, South, the comprehensive area assessment, or Oneplace, is an inspection process, so it is not really covered in the audit code, although I understand what he says. I quite agree with his wish to see the Audit Commission and associated bodies more as critical friends than just as critics.

I thank you, Mr. Russell, and hon. Members of all parties. I wish Opposition Members well with their colds.